Naxos – a tough assignment

Posted: January 10, 2013

That may sound like the scenario for an Alistair MacLean potboiler, and you wouldn’t be far wrong.  The Naxos case[1] has plotting and intrigue aplenty, but it is a rather more genteel affair set in the world of classical music.

Like MacLean, the case is Scottish heard before the Outer House of the Court of Session.  The case turned on an assignment, or strictly speaking an agreement to assign.  Pivotal to the case was an assessment of whether that provision effected an immediate transfer of copyright which it did, on true construction of the parties’ intentions.  Also under scrutiny was whether a director was jointly and personally liable for copyright infringement, on the basis of acting in concert with his company and/or his actions in his individual capacity.  On the evidence, he was found to be liable on both fronts.

 Where Eagles Dare a reckless mission

The defenders were Project Management (Borders) Limited and its sole director and shareholder, Mr Keith Salmon. They licensed classical recordings through their website, www.royalty-free-classical-music.org.  These included recordings owned and not licensed to the defenders by the pursuer, Naxos Rights International Ltd.  The recordings in question were:

(a)           recordings of Vivaldi’s The Four Seasons, which were commissioned in 1987 by a Hong Kong company called Pacific Music Co. Limited; and

(b)           a recording of the Christmas carol, Joy to the World, which was commissioned in 1992 by HNH International Limited (formerly known as Pacific Operations Limited).

According to Naxos’s evidence, from around August 2005, Project Management had offered a Four Seasons recording for sale and licence on its website, and as a digital album download on iTunes and Amazon.  It had offered a Joy to the World recording for sale and licence on its website. It had also licensed the recordings for resale by other websites, on terms purporting to permit their use in film and television and other works without payment of further royalties.  Naxos claimed that these recordings were copies of their copyright works, and that there had been infringement by copying and issuing copies to the public.  Further, Naxos claimed that Mr Salmon had authorised or procured infringement, and further or alternatively that the infringing acts were in fact carried out by Mr Salmon himself.

San Andreas a fault-line in the chain of title?

The first issue was whether Naxos was in a position to sue in relation to the Four Seasons recordings.  The defenders’ case was that Naxos never attained title.[2]

Under an Asset Transfer Agreement dated 31 March 1989, Pacific Music agreed to sell its rights in the “Pacific Music Businesses” to its parent company, Pacific Operations. Clause 2.1 of that agreement provided that, with effect from 31 December 1988: “Pacific Music shall sell and [Pacific Operations] shall buy the Pacific Music Businesses.”  The “Pacific Music Businesses” were defined as “all of the businesses hitherto carried on by Pacific Music in the exploitation of … the Retained Labels”, along with all related intellectual property rights.  The definition of “Retained Labels” included Naxos.  In May 1989 Pacific Operations changed its name to HNH International Ltd.   Some years later, by two separate Asset Transfer Agreements both dated 31 July 2003, HNH assigned all its intellectual property rights to Naxos’s chief witness, Mr Klaus Heymann, who then assigned them to Naxos.  In each case, the rights included the copyrights in the Four Seasons recordings.

The defenders contended that the 1989 agreement was not effective to transfer those copyrights to Pacific Operations.  This was because the 1989 agreement provided that Pacific Music “shall sell” and Pacific Operations “shall buy” (i.e. in the future tense), but there was nothing in writing to effect that future transfer.  They pointed out that the 1989 agreement was not accompanied or followed by a deed of assignment or anything comparable. As such, they argued, the 1989 Agreement did not satisfy the statutory requirement[3] that an assignment of copyright must be in writing signed by or on behalf of the assignor, and so there was a break in the chain of title to Naxos.

The judge, Lord Glennie, rejected this argument. He noted that a document transferring copyright need not be in any particular form, nor use any particular words.[4]  The ordinary rules of construction applied: the test was whether, viewed in its context, the parties to the agreement intended that copyright was to pass under it.  If that was the intention, the use of the future tense was “of no importance”.

On the facts, Lord Glennie considered that the 1989 agreement could itself be regarded despite the “infelicitous use of the future tense” as an agreement for transferring the relevant businesses, including the recordings of The Four Seasons.  The context in which the agreement was entered into provided clear support for this, in Lord Glennie’s view.  First, the asset transfer was linked to a deal at the time with Bertelsmann Music Group, under which Pacific Music and its subsidiaries were sold to BMG AriolaMusik GmbH in 1989.  It was agreed that certain labels (including Naxos) would be excluded from the sale.  To achieve this, they were to be transferred from Pacific Music to Pacific Operations. The sale of Pacific Music to BMG Ariola was effected by a Share Sale and Purchase Agreement, which provided that, before completion, Pacific Music would transfer certain assets to Pacific Operations, including Naxos and the copyright in the recordings published on the Naxos label.  Indeed, BMG Ariola was joined as a party to the 1989 agreement to confirm its knowledge and agreement to that arrangement.  Accordingly, all parties clearly intended that the 1989 agreement should in fact transfer the recordings to Pacific Operations “at that time, and not at some unknown time in the future”.  As such, the 1989 agreement was effective to achieve that transfer “without the need for a further agreement or deed of assignment”.

It was suggested at one point in the hearing that the assignment of the copyright to Pacific Operations may have taken place not by reason of the signed 1989 agreement, but by a separate, later agreement of the parties to effect the transfer immediately.  Lord Glennie did not think that correct, in light of his construction of the 1989 agreement; however, referring to the decision in the Crosstown case,[5] he alluded to the possibility that, even if such a separate agreement did not in itself satisfy the statutory requirement for writing (for example, an oral agreement), the transfer could be considered to be in writing for the purposes of the statutory requirement for writing, in as much as it would simply be implementing the written 1989 agreement.  In Crosstown, the court was satisfied that an automatic “reverter clause” of the type commonly included in music publishing agreements was effective to transfer copyright despite the statutory requirement for writing.

The Last Frontier – a last-ditch defence

The defenders maintained, with little credibility, that the recordings of the works on their website and offered through distributors were not actually taken from the Naxos recordings, but were recordings of performances commissioned by the defenders. Lord Glennie rejected the defenders’ submissions: the expert evidence showed that even the versions that Mr Salmon claimed to have been the versions of the works available to be downloaded from the site were either partially or wholly taken from the Naxos recordings.  Lord Glennie was therefore satisfied that Naxos’s case on infringement was made out for all the recordings concerned.

When Eight Bells Toll the position of Mr Salmon

The next question was whether Mr Salmon was personally liable.  As to be expected, he sought to rely on the principle in Saloman v Saloman[6] that, applying the case to current circumstances, the acts done by the company were not his own acts but those of the company (for which he was not liable). According to Naxos, this should not protect him in circumstances where he procured the breaches of copyright by the company and he and the company, both separate legal entities, were acting in concert pursuant to a common design.[7]  Finding for Naxos, Lord Glennie agreed that the fact that Mr Salmon was a director of the company did not place him in some protected category.  Lord Glennie cited the four principles set out by Lord Justice Chadwick in the MCA Records case[8], i.e. that:

(a)           a director is not liable as a joint tortfeasor if he “does no more than carry out his constitutional role in the governance of the company”;

(b)           a director or controlling shareholder of a company can be liable as a joint tortfeasor if “he is not exercising control through the constitutional organs of the company and the circumstances are such that he would be so liable if he were not a director or controlling shareholder”;

(c)           liability as a joint tortfeasor may arise where the individual “intends and procures and shares a common design that the infringement takes place”;[9] and

(d)           such liability as a joint tortfeasor may arise whether or not there is a separate tort of procuring an infringement of a statutory right (actionable at common law), so liability may arise under both heads.

Applying these principles, Lord Glennie had no doubt that Mr Salmon should be held jointly liable for the infringements, on the basis of procurement and of acting in concert with the company for a common purpose.  In addition, Lord Glennie found Mr Salmon personally liable for his own acts as a principal.  On the evidence, he was acting not only as a director of the company, but also as an individual in setting up the website and selling infringing material through it.  This was clear partly from his own account that he had commissioned the Four Seasons recording in Bulgaria and had subsequently entered into a licence agreement with Project Management to sell the tracks on his behalf.  As such, he was purporting to deal with the company as a separate entity.  Further, the website was registered in his name as an individual, and it was in fact operated together by Project Management and by Mr Salmon. The site even included a statement purporting to come from Mr Salmon that “I own the copyright to all of my recordings”.  Additionally, sales receipts recorded the distributor sometimes as the company and sometimes as Mr Salmon.

Fear is the Key lessons to be learnt

 Content users should see this case as a cautionary tale.  While Mr Salmon may have been “bang to rights”, and almost risibly so, content users should ensure that proper licences of content are secured no easy task, for instance, in the present digital music landscape, with its plethora of collecting societies, record labels and music publishers (major and independent).  Besides, directors should take particular care not to attract personal liability, by ensuring that at every stage the directors’ acts are carried out explicitly on behalf of and in the name of the company, and that all rights (whether in third-party content or in the company’s assets, such as its trade marks and domain names) are held by the company preferably from the outset.

 One moral of the story for copyright practitioners is simple enough: put your assignment of copyright in the present tense.  Even if a court might interpret the wording in your favour, you will certainly not want to rely on a purposive reading of the parties’ original intentions.  Equally, if you come across a potential kink in a chain of title because the future tense has been used in an existing document, you should have the parties execute a confirmatory deed of assignment to put the ownership position beyond doubt.  In a due diligence exercise, an appropriate warranty should be sought (or, from a seller’s perspective, a suitable disclosure should be made against such a warranty).  Further, in the context of a business or asset sale between companies, the sale and purchase agreement (or the ancillary documents) should include an express and present assignment of copyright.  That is, if you want to avoid Force 10 from Navarone.

 Ed Baden-Powell, Partner, Michael Simkins LLP
Article written for Entertainment Law Review.


 [1] Naxos Rights International Ltd v Project Management (Borders) Ltd [2012] CSOH 158 (9 October 2012).
[2] No such problem arose in the case of the Joy to the World recording.
[3] Now in section 90 of the Copyright, Designs and Patents Act 1988.
[4] See, for example, Cray Valley Ltd v Deltech Europe Ltd (2003) EWHC 728.
[5] Crosstown Music 1 LLC v Rive Droite Music Ltd [2012] Ch 68.
[6] Saloman v Saloman & Co. Ltd [1897] AC 22.
[7] Here Naxos referred the court to L’Oréal SA v eBay International [2009] RPC 693 and Twentieth Century Fox v Newzbin [2010] FSR 21.
[8] MCA Records v Charly Records Ltd [2002] FSR 26.
[9] CBS Songs Ltd v Amstrad Consumer Electronics plc [1988] AC 1013.